q1

(d) Find the optimal level of consumption today and in the future. For this question assume that the inflation rate is 0 and therefore, nominal and real interest rates are equal. Consider a two period model of the economy and assume the real interest rate is 20% (R=0.20). The lifetime utility function of the household is U = log(ctoday) + 0.510g(cfuture). Financial wealth today is $5,000. Pre-tax labour income today is $30,000 and in the future $58,000. Taxes are $5,000 today and $10,000 in the future. The Euler equation is: Cfuture = 05 (1 + R), where R=0.20 Ctoday